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Capital Accumulation and Dynamic Gains from Trade

We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation and trade imbalances. We develop a gradient-free method to compute the exact transition paths for 44 countries following a trade liberalization. We fi nd that (i) the gains are negatively correlated with size, measured by total real GDP, (ii) larger countries accumulate a current account surplus and financial resources flow from larger countries to smaller countries boosting consumption in the latter, (iii) countries with larger short-run trade defi cits accumulate capital faster, (iv) the gains are nonlinear in the reduction in trade costs, and (v) capital accumulation accounts for substantial gains. The net foreign asset (NFA) position before the liberalization and the intensities of tradables in investment goods production and consumption goods production are quantitatively important for the gains.

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